The question many market players are asking this morning is whether it is time to start anticipate market downside. The S&P 500 hit a new all-time high on Wednesday, but most of the big-cap S&P 500 stocks have reported earnings now, the Fed is on hold as far as further interest rate cuts, the China trade issue is going to cause some issues and there is still chatter about a slowing economy.
The arguments for market downside are obvious and compelling, but should we sell positions and raise cash now in anticipation of substantial downside?
That is the approach of many market strategists. Doug Kass clearly believes that now is the time to build short positions and to be ready for some poor action.
Doug may be correct, but I believe that it is better to react to changing conditions as they develop rather than to try to anticipate what will happen. It simply isn't possible to time what the market will do next. Bears were convinced that the market was going to fall apart following the vague and uncertain "Phase One' China deal that was made a couple of weeks ago. Instead, the indices have rallied nicely during earnings season and stock picking improved dramatically as small-caps bounced.
After that run, it seems logical to once again anticipate that the market may correct. The action on Thursday was poor -- and it was even worse than it looked because Facebook (FB) and Amazon (AMZN) helped to cover up some of the weakness.
My approach to dealing with the market at this point is to stay open-minded and flexible. I don't think it is possible to predict what the market will do next, but it is possible to manage positions carefully as the price action shifts. All I have to do is make sure that I have a plan to cut losses quickly if the market action deteriorates. If I am aggressive at reacting to poor action and don't just sit and hope that a stock will recover, then I put myself in a position to make money if the bears happen to be wrong yet again.
Making money in the market is much more a function of trade management than market prediction. If you focus on the pennies then the dollars will take care of themselves.
Friday morning, we have some bounce in the indices but a horrible earnings report from Arista Networks (ANET) is going to cause some sector rotation. The main challenge of navigating the market right now isn't the direction of the indices, it is the sector rotation. If you are in the wrong sectors, shorting the indices isn't going to help you much.
The big picture bear arguments are always interesting, but they are a very poor way to trade for most of us. Stay vigilant and reactive and you can handle whatever this market might do next.
